Renesas president won't quit, lays out priorities

TOKYO – Just a few hours after the news broke Wednesday morning (Aug. 29) about private equity firm KKR’s plans to invest 100 billion yen ($1.27 billion) in Renesas Electronics Corp., Yasushi Akao, president of the struggling Japanese chip company, sat down with EE Times at Renesas headquarters here to outline plans for the company’s survival.

As expected, Akao declined comment on the potential KKR-Renesas deal. He offered no specifics on who may purchase the ailing Japanese chipmaker’s fabs, or where the company’s SoC business may eventually end up.

Unexpected was his willingness to talk.

Instead of brushing off talk of the company’s possible liquidation as speculative, Akao (below) took the time to explain – in a calm, measured voice, choosing his word carefully. He described his initial Renesas restructuring plan when he became the president of combined entity of Renesas Technology and NEC Electronics in 2010; what assumptions he had made then; how things have changed since; and what he now views absolutely as the key strategies to putting Renesas back to profitability.

Comparing then (2010) and now, the biggest alteration Akao was forced to make in his vision was to accept a big capital infusion from outside. Of course, a new owner, in turn, means that Reneas eventually won’t be able to control its own destiny.

Akao had originally planned to slash cost, reorganize the business and make sweeping changes in Renesas Electronics on its own, by using the gradual revenue growth the company had expected — roughly at 7 percent.

However, Renesas today, two years later, is forecasting a record annual net loss of 150 billion yen for the fiscal year ending March, 2013. This loss matches the 155 billion yen Akao had earmarked for restructuring.

Instead of achieving independence, Renesas had to go back to its parent companies to beg for more money, just to survive. This persuasion has taken longer than anyone had hoped for, but Akao confirmed Wednesday that Hitachi, NEC and Mitsubishi, the three shareholders of Renesas, have agreed to provide a total of 50 billion yen through loans and other measures. Bank of Tokyo-Mitsubishi UFJ and three other lenders also plan to provide 50 billion yen through a credit line, he added.

It’s debatable, though, if even100 billion yen is enough to keep Renesas afloat, let alone restore the company’s prosperity. To act on the restructuring plan more quickly, Renesas is likely to need more capital.

Today, it’s clear that Akao’s original scenario of unilateral restructuring is no longer an option.

While many already speculate that KKR may demand drastic management changes at Renesas, Akao ruled out any plans to step down. During the interview Wednesday, Akao said, “I do understand that a president is ultimately responsible for the company’s financial performance.” But he said his sense of duty keeps him committed to the job, instead of opting for the easy way out. “I need to make sure that we put a ‘process’ in place to get the company back on track first. Without accomplishing that, I feel as though I’ve finished only half the job I’m tasked to do,” Akao explained. While his statement is stoic and admirable, it begs the question of whether KKR — or any other trigger-happy financial investor — will buy Akao’s argument.

Renesas Q1 balance sheet

Source: Renesas

At the core of Renesas’ current restructuring plans lie the following four priorities Akao has in mind.

1. Consolidate the company’s current SoC business. In particular, Renesas will stop investing in R&D for SoCs whose life cycle is shorter and ROI is lower.

2. Execute a Fab lite strategy: Reduce the company’s nine front-end production lines to seven, either through sales or substantial integration over the next three years. Bring down the company’s nine back-end lines to two, by sales and reducing production.

3. While continuing to focus on the MCU business, expand the company’s analog/power semiconductor business proportionate to the industry-wide market size/growth.

Renesas had already been merged with NXP, hadn't it?
Please take a look at following spice models on their website, as provided with their power products customer respectively.
Renesas
http://am.renesas.com/media/products/discrete/pmosfet/simulation/rqj/rqj0303pgdqa.txt
NXP
http://www.nxp.com/documents/S-parameter/PMV31XN_29_03_2012.lib
Purely identical!

i agree with you on the smart society. SuperH wont be able to compete with parts from TI, freescale.
For automotive MCU, in the engine controller there is unique need. For Car radio/entertainment part, other than being automotive qualified, i think there is no much difference from consumer part.

It's funny that Mr. Akao mentioned the MCU business as the focus onwards, because Renesas has always seemed very schizophrenic w.r.t. the multiplicity of architectures it has to support. A big mistake, I think, is Renesas' failure to present a coherent upgrade path from legacy architectures to the newer ones (i.e. RX, RL78).
And if Renesas really wants to drive home the low-power, deeply embedded "smart society" concept, it should cut the cords to "performance" families like SuperH, still with 4.5V (!) processors under development. Granted, the automotive MCU market has unique needs, but geez, 42mA during sleep @ 80MHz would make even TI's C2000 blush.

i have used renesas chip for 6 years and another 6 years kicking them out in designs. I will tell you why renesas can become the number 1 mcu vendor. Because they sell at a loss.. when TI are selling their omap at 20-30 dollar. similar chip are being sold by renesas at 6-10 dollar (similar is a bit difficult to say as we cant compare line by line the datasheet)...they would sell a chip at more than half the price originally they quoted if some other vendor gives a lower price. They win the market by aggressive pricing.. not sure if they can really profit from this.

casual3, a very insightful analysis here. I agree. I find your second point especially interesting..."agreesive design and higher productivity" would still allow Qualcomm and Broadcom to reap huge reap.
Why do you think Japanese semi vendors have the worst cost structure?

Thanks, daleste.
Yes, the MCU business is a promising one, but as you say, it is not easy if you want to go beyond selling it to the usual suspects.
Akao-san also stressed the importance of the company's analog and powersemiconductor business. But Renesas isn't as well know as for that segment, when compared with others in the global market.

All of Akao's priorities are good moves: dump merchant SoC business, fab-lite, focus on MCU.
Problem is: those are reactive instead of pre-emptive moves.The wild card is the "smart society", but that one is too broad to quantify, need more concrete execution plan.
Japanese semiconductor companies are suffering because of 2 things:
1. demand side: Japan's economy is in a doldrum and Japanese CE companies are collapsing (used to be their biggest customers)
2. supply side: semiconductor industry as a whole is becoming commodity (will soon compete mostly on cost), and Japanese semi vendors have the worst cost structure, both in terms of gross margin and net margin. For gross margin, their designs are the most conservative, leading to larger dies and more power and larger packages and therefore cost more. For net margin, their R&D cost is much higher than their US counterparts because of the cultural differences (though both have high human cost), which leads to lower productivity than the US. Therefore, the US companies like Qualcomm and Broadcom can still reap huge profits (by aggressive design and higher productivity), even if their cost structure is higher than the asian fabless firms, while the Japanese is in the red.
Unless the above fundamentals can be changed, nothing could save Akao-san and Renesas.